For those interested in issues such as climate change, social inequity, and the financial crisis, join me in a dialogue to explore the challenges and opportunities associated with sustainability and the role of business in a sustainable society.

Friday, April 2, 2010

Strategy and Sustainability

I’m working on a paper right now that is flagging some of the inconsistencies between business strategy and sustainability. In a nutshell, business strategy is all about differentiating firms from their competitors. We strategic management scholars develop frameworks to explain how and why companies outperform competitors in their respective industries. So how does Sony work to outperform Panasonic, Coca-Cola outperform Pepsi, Air Canada outperform WestJet, etc. There are many ways in which they do this but fundamental in the strategy discipline is an attempt, if at all possible, to create a monopoly situation. Microsoft is the model here because they’ve monopolized the operating system market (although Apple is trying to take chunks out of their market share). Google has a dominant position in the online advertising and searches while Apple is dominant in the online music and handheld music device industry and now more recently a growing dominance in the handheld smart phone industry. This is interesting to strategy scholars because it explains why companies are outperforming others.

But when we consider this strategic behaviour in the backdrop of sustainability, it starts to breakdown because if firms are working to lock-in industries so that enough inertia is created to make change impossible, we may not be able to respond to major social, ecological, and governance issues as they arrive. Consider the energy sector or better yet the oil and gas sector. These industries have been very successful because a number of companies and industries are dependent on the supply of oil. This is a model example of strategic success when we consider how dependent we all are on oil and imagine how difficult it would be to move away from our dependence on plastics, gasoline, combustible engines, fertilizers, etc. There’s no wonder that this industry is so profitable ($40B – Exxon in 2007) and why it’s difficult for competitors to take chunks out of their market share. This same story can be told in the food industry where food barons have successfully monopolized the food system to their liking making consumers and suppliers very dependent on what they do. More recently, large businesses are starting to monopolize the fair trade movement weeding out many small players – ironically the ones who created the fair trade movement.

The point I’m trying to make here is that strategy encourages the locking in of companies and products/services so that enough inertia is created that change is all but impossible. In a society where we need relatively quick and radical change to address social, ecological, and governance issues, we can’t afford to have these sorts of monopolistic positions.

I’ve spoken about Better Place before. They are working to build the necessary infrastructure to replace gasoline stations so that you can purchase an electric vehicle and, instead of filling up with gasoline, you go into a service station to replace your battery. Now this is the first and presently only company to be thinking about this so they are certainly primed for a monopolistic opportunity. But when asked whether his company is attempting to earn a monopoly position, here was the CEO Shai Agassi’s answer:

Agassi: “We asked governments wherever we go to…force all the [competitors]…to do two things. One, [to] only use international standards so that nobody can control it. The plug has to be standard and everyone will be able to use that same standard so there is no way to lock anybody out. Two, [to] force every network that is created to allow everyone else to access it so there is open access across the network. [Governments] usually ask us if we’re crazy to be the first [to market] and not ask for protection but to [instead] ask for openness. And my view is: god forbid that we would have two standards coming into the market [where] we’ll have VHS and BETAMAX and the consumer sits back and says, ‘I’ll just take my time’. …collectively we don’t have time, we ran out of time. We already did that in the last [few] decades. Now the only thing we have to do is [not] think how to make the most profit out of every single consumer but how we switch as fast as possible.”

Now this is business leadership and, to me, questions the very foundation of what strategic management represents and more importantly suggests that we need very different business management frameworks that build in triple bottom line thinking into managerial decision-making.

2 comments:

So I like how you are highlighting the inconsistencies between business strategy (again, not my area of expertise) and sustainability, and once again, you make some rather cogent points. But I still question some of this. For example, certainly business strategy for things such as soft drinks, airlines, and computer operating systems is different from the oil and gas sector in the sense that a great deal more advertising and marketing must go into the former. That is, people don't have to be convinced to buy cars, but rather just which one to choose. Plus, the majority of companies around the world are in fact dependent on the supply of oil. So the larger point that I am seeing here is how to reduce our dependency on oil, which contributes in large measure to major social, ecological and government issues. I also see your point that monopolies and the resultant intertia further stalls our ability to deal with these issues in a quick and radical way.

As for Better Place, again, the cynic in me comes out. I don't question the necessity of this type of company, but rather the viability of it in a world marked by embedded neoliberalism that consistently promotes the creation of new businesses. To me this idea is excellent in theory, for we need to reduce our dependency on gasoline. However, the cynic in me ponders the emergence of a "Wal-Martified" competitor who comes up with a less expensive battery that it can build in huge volumes and thus garner a larger market share through cheaper prices. What makes Agassi think that this isn't going to happen with his project. This potential reminds me of aftermarket auto parts -- they solve the problem, but at a much cheaper rate. So yes, Better Place is primed for a monopolistic opportunity, which they aim to avoid through standardization and openness. But what about the competition that would most likely emerge from other companies...wouldn't we just re-enter the same cycle of monopolies, locking-in, and inertia that would prevent our abilility to address social, ecological, and governance issues? To me, this is the nature of capitalism, and even green companies have to work within a world marked these dangers.

Further, building and running electric cars requires the use of dirty technologies such as coal fired or nuclear power stations. Here is an article that delineates more of these problems: http://www.newcarpark.com/blog/?p=68So promoting the use of electric cars over gasoline powered ones is not necessarily the answer. I say that we need huge marketing and advertising campaigns to promote the building of better and more efficient public transportation systems in this country, and the money that is being invested in Better Place would better spent in investing in public transportation.

I agree that the oil and gas industry is an extreme example but that doesn’t preclude the broader strategic ideology associated with other industries pushing for a similar competitive position and the implications of that.

Your point about “Wal-Marting” the battery replacement industry is an interesting one and, I agree, a concern. I’m not sure if this is a major issue. I wish I could ask Agassi as I’m sure he’s thought about this. I think the battery technology will indeed improve over time and will likely reduce in price but Better Place’s value proposition is the infrastructure required to replace these batteries. If new batteries emerge, they will likely be interested in purchasing them and incorporating them inot the system. And I hear you on the pollution associated with the electric car. There has been many criticisms of this and I believe I posted something on this.

Thank you for the elaboration of the fair trade area. I completely agree that this brand has been enveloped by big business interests. The same is happening with organic food certification. I had a guest speaker in the other day talking about the monopolization of fair trade by big companies.